By Steven K. Beckner

WASHINGTON (MNI) – Federal Reserve policymakers voted unanimously
Wednesday to discontinue quantitative easing at the end of June on
schedule, but made clear that the end of QE2 will not constitute a
tightening of monetary policy.

Although the Fed’s policymaking Federal Open Market Committee
agreed to stop expanding its balance sheet — and bank reserves —
through purchases of longer term Treasury securities, it acted to
prevent any shrinkage of the balance sheet and reserves by authorizing
the New York Federal Reserve Bank to continue reinvesting principle
payments from its securities holdings.

This means that the Fed will continue to provide ample monetary
ease through the quantitative channel and exert downward pressure on
long-term interest rates — for the foreseeable future.

What’s more, as expected, the FOMC left its federal funds rate
target at zero to 25 basis points, where it has been since December
2008. And the FOMC statement reiterated its expectation that it will
stay “exceptionally low … for an extended period.”

The FOMC gave no indication in its policy announcement that it
plans to exit from its highly accommodative stance anytime soon, which
is very much in keeping with financial market expectations.

The FOMC statement justified its extension of easy money policies
by noting that the economy is slower and the labor market weaker
than expected. Meanwhile, it said inflation has “picked up” but is
likely to subside.

The FOMC left open the possibility of a resumption of quantitative
easing by reiterating that it “will regularly review the size and
composition of its securities holdings and is prepared to adjust those
holdings as appropriate.”

And it added, “the Committee will monitor the economic outlook and
financial developments and will act as needed to best foster maximum
employment and price stability.”

The essentially unchanged policy was taken after the FOMC went
through its quarterly exercise of revising its three-year economic
forecast, results of which will be released shortly.

“Information received since the Federal Open Market Committee met
in April indicates that the economic recovery is continuing at a
moderate pace, though somewhat more slowly than the Committee had
expected,” the statement says. “Also, recent labor market indicators
have been weaker than anticipated.”

The Fed said “the slower pace of the recovery reflects in part
factors that are likely to be temporary, including the damping effect of
higher food and energy prices on consumer purchasing power and spending
as well as supply chain disruptions associated with the tragic events in
Japan.”

“Household spending and business investment in equipment and
software continue to expand,” it continued. “However, investment in
nonresidential structures is still weak, and the housing sector
continues to be depressed.”

“Inflation has picked up in recent months, mainly reflecting higher
prices for some commodities and imported goods, as well as the recent
supply chain disruptions,” the Fed said. “However, longer-term inflation
expectations have remained stable.”

Unlike past statements, the Fed did not say underlying inflation is
“subdued.” However, it used other words to signal that it is not alarmed
by the upcreep in prices. “Inflation has moved up recently, but the
Committee anticipates that inflation will subside to levels at or below
those consistent with the Committee’s dual mandate as the effects of
past energy and other commodity price increases dissipate.”

“However, the Committee will continue to pay close attention to the
evolution of inflation and inflation expectations,” it said.

The Fed said “the unemployment rate remains elevated; however, the
Committee expects the pace of recovery to pick up over coming quarters
and the unemployment rate to resume its gradual decline toward levels
that the Committee judges to be consistent with its dual mandate.”

On the whole, the FOMC gave a distinctly gloomier appraisal than
the one the FOMC issued on April 27, which in turn was less upbeat than
on March 15. And that assessment will likely be reflected in the FOMC’s
forthcoming revised economic projections.

In April, the FOMC said “the economic recovery is proceeding at a
moderate pace and overall conditions in the labor market are improving
gradually.”

In March, it said “the economic recovery is on a firmer footing,
and overall conditions in the labor market appear to be improving
gradually.”

Since the last meeting, there have been a series of disappointing
data, most notably the May employment report, which showed a meager
54,000 rise in non-farm payrolls and an uptick in the unemployment rate
to 9.1%.

Household wealth has been hurt not only by plunging home prices but
also by, until very recently, falling stock prices.

Against that dreary backdrop, the FOMC appears to have locked in an
indefinite period of very low interest rates for both borrowers and
savers.

Fed Chairman Ben Bernanke will have more to say at a press
conference shortly.

** Market News International Washington Bureau: 202-371-2121 **

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